The new income tax return forms notified for the tax year 2017-2018 have come up with the required disclosure of gifts. Until last year, there were no such separate disclosure requirements for filing of tax returns. This article will talk about the how gifts are taxed in India and the related disclosure in the tax returns.
The Indian legislative system sought to levy tax on gifts in the hands of the donor by enacting the Gift Tax Act, 1958. This legislation was abolished in 1998.
Six years later, the Finance Act 2004 introduced section 56(2)(v) for taxing gifts in the hands of the recipient. Accordingly, today gifts received by an individual or Hindu Undivided Families (HUFs) will be taxed as under:
Gift of money: Aggregate value of cash gifts received without consideration during a financial year (FY) would be taxable as other income in the hands of the recipient. However, if the aggregate value of such gifts is less than Rs 50,000, then it would be exempt from tax. For example, if an individual receives gifts worth Rs 75,000 in a tax year, then he is required to pay tax on the full amount. However, he will not be liable to pay tax if the aggregate value of gifts is less than Rs 50,000.
Gift of immovable property: In case of gifting of immovable property (i.e., land or building), the recipient would be required to pay income tax if the stamp duty value of the property exceeds Rs 50,000 and such property is received without adequate consideration.
Any inadequate consideration received wherein the difference between the consideration and stamp duty value exceeds higher of Rs 50,000 and 5 percent of consideration, such difference shall be taxed in the hands of the recipient.
Let’s assume that consideration is Rs 1,50,000 and stamp duty value is Rs 400,000
Difference between stamp value and consideration is Rs 2,50,000 which exceeds higher of below (i.e., Rs 50,000):
a. The exemption threshold of Rs 50,000; and
b. 5 percent of 150,000, i.e., Rs 7,500.
Hence the taxable value would be Rs 2,50,000.
The above principles for taxing will apply even for gift of movable property, except for the condition of 5 percent of consideration. However, instead of stamp duty value, the fair market value (FMV) of the movable property has to be considered for valuation purposes. Jewellery, paintings, drawings, shares and securities, archaeological collections, sculptures, bullion and any work of art are defined as movable property. For instance:
If FMV of jewellery is Rs 2,50,000 and is gifted without any consideration, then the full amount (FMV) is taxable as income of the recipient.
If, on the other hand, there is a consideration of Rs 1,00,000 for gift of jewellery, then the taxable value will be Rs 1,50,000.
It may be interesting to note that some of the typical movable objects like cars and bikes are not considered as movable property.
Although ITR 1 and ITR 4 tax forms don’t specifically require disclosure for taxable gifts, ITR 2 and ITR 3 mandate disclosure of taxable movable/immovable properties received as gifts during the year. Exempt gift could be disclosed in schedule EI (Exempt Income).
The recipient is not required to pay income taxes if the money or property is received from a relative or under certain specified circumstances such as on the occasion of marriage or under a will or by way of inheritance, or in contemplation of death of payer etc. This rule applies irrespective of the value of the gift.
Here, relative is defined to mean spouse, brother or sister, brother or sister of the spouse, brother or sister of either of the parents, lineal ascendant or descendant, lineal ascendant or descendant of the spouse and spouse of the aforementioned persons.
For instance gift received from your aunt/uncle’s son or daughter etc., is taxable as they are not considered as a relative.
Taxation of gift from employer
The legislations have been penned so as to levy tax even if gifts are provided by an employer to employees. Such gifts are taxable in the hands of the employees as salary income provided the aggregate value in a year is Rs 5,000 or more.
Gifting has always been seen as a way for people to express love and affection. With the increased focus on taxation, it becomes imperative to know its taxability, how to disclose it correctly, and maintain documents (gift deeds, property registration etc.) diligently.
(Sudhakar Sethuraman is Partner Deloitte India and Vibha Bhaskar is Manager with Deloitte Haskins and Sells LLP.)